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A half-baked economic revival?

Small American towns are trying to attract new tech firms to old industrial buildings. But what about the infrastructure?

Downtown Beloit, WI (Wikimedia)

The small town of Beloit, Wisconsin was the subject of a recent New York Timesfeature on the efforts of a wealthy (although relatively obscure) billionaire to help revitalize the depressed economy of a former midwestern industrial town. Diane Hendricks, the founder of ABC Supply, has bought up numerous old buildings in the town with the hope of transforming disused industrial buildings into new offices for software and other technology firms. The piece describes her efforts, and some of the new businesses that have chosen to locate here. Yet, reading the article and the hopeful yet relatively small developments described, one cannot help but wonder what will come of these investments? What will become of Beloit, a town of 39,000 that is just over a two-hour drive from Chicago? And, if private investments by one very wealthy benefactor are not matched by larger public investments, will any revival be sustainable over the long-run?

Rock County, of which Beloit is a part, voted for Hillary Clinton in 2016 by about 52% to Trump's 42%, even as Wisconsin went for Trump by a very slim margin, turning the state red for the first time in decades, and helping hand the presidency to Trump. Yet, it is small towns like Beloit which have come to symbolize the declining fortunes of American manufacturing and their mostly white inhabitants whose disillusion and frustration has been seen as a major factor in Trump's victory.

Ms. Hendricks, herself a Trump supporter, has spent $40 million of her own money to renovate the foundry, an old factory, and turn it into a co-working space for several local software firms. Today, the "ironworks" employs about 1,000 people, whereas the old foundry located there had employed about 5,000 when it was in business. Several startups now occupy the building, including Comply365, which makes software used by airlines, including Southwest. Beloit College also serves as an anchor of growth in the town. According to urbanist Richard Florida "college towns number among the nation’s leading centers for start-up activity on a per capita basis." So, all things considered, the developments in Beloit are a welcome shift towards a better future. And yet, one cannot help but worry that such a small town in a small rather remote part of the midwest, will not be able to truly compete in the long run, especially on attracting and retaining talent needed to power any high-tech jobs such as software development.

If there's something missing from Benoit's formula, it's any serious level of state investment or infrastructure. And, for towns like Benoit located more or less outside of a comfortable commute time to major metropolis (like Chicago, which is over 2 hours away), linking themselves more closely to nearby metropolitan economies might be the only way they can ultimately sustain themselves as part of the larger metropolitan, and global economy.

Right now, Benoit's chief comparative advantage (in terms of the calculus of software companies looking where to set up shop) is affordability. Workers here are obviously much cheaper than workers in the Silicon Valley, and lower costs of living allow workers to buy a house quite easily. But, small towns like Benoit may not be able to survive merely by attracting a few small jobs. Connecting Benoit with nearby cities like Madison, Wisconsin or even Chicago would make it a much more attractive place to live. And, as transportation costs are lowered, Benoit would be an even more attractive investment destination. In short, the future of small towns like Benoit depends on integrating them into larger regional economies--in this case, the regional economy of Chicago and the upper midwest.

A similar situation was recently documented by the Wall Street Journalin Springfield, Massachusetts. The city, lying a similar distance from Boston as Benoit is from Chicago, has struggled to attract new development that is currently happening in other cities in the Boston region connected by commuter rail to the city. Boston, home to high-tech firms and new startups spinning off from MIT and Harvard, has spurred a boom in housing across the region. Yet Springfield, with no direct commuter rail service to Boston, has so far been left behind. Local representatives are trying to bring a direct rail link to the city, but so far to no avail.

It's these very types of public investments--like high speed rail, that many of the GOP base have been trained to react instinctively against. After Obama rolled out an ambitious vision for high-speed rail corridors around the country, Republican governors and others did their best to torpedo them. Obama's plan included efforts to make Chicago the head of a midwestern high-speed network. Predictably, the GOP congress has nixed most of these new proposals even as some individual state efforts have gone forward, most notably in California under the leadership of Jerry Brown. But, it is precisely this kind of regional infrastructure that could lead the way to better futures for numerous smaller cities and towns brought into the fold of larger metropolitan regions. Global strategist Parag Khanna, whose book Connectography details the numerous ways that countries are attempting to forge more connective infrastructure to foster growth, outlined a vision for America based on megaregions rather than on existing state borders. As Khanna writes, "Consider how parts of the Rust Belt could benefit from this approach. A Midwestern high-speed rail network that ran from Southern Illinois to Southern Michigan would not just link wealthy investment hubs like Louisville, Ky., and Columbus, Ohio; by tying in high-unemployment cities like Dayton, it would make it easier for workers to commute to where the jobs are."

Beloit lies midway between Minneapolis and Chicago on a high-speed rail route as envisioned in the map below. However, the risk with Beloit's current grassroots development is that it is not followed by any transportation infrastructure. This will limit how many workers can benefit from Benoit's development, and how many workers could move to Benoit and commute to jobs across the region. Infrastructure could also lead to more development in non-tech sectors, such as tourism or agribusiness, thus promoting a diverse economy as opposed to one reliant on a few small tech firms that may have decided to locate here.

A map of U.S. megaregions, as featured in a 2016 New York Times article.

The kind of growth in Beloit may be a particularly American vision of how economic development happens: visionary individuals, wealthy capitalists, small-scale changes and a large dose of Horatio Alger optimism. But, this hands-off approach to local economic development is will end up in wasted investments and missed opportunity. Sure, the redevelopment of an old industrial town through private philanthropy and investments should be a welcome step. But, it's not enough to truly transform the economic futures of towns across the United States.

Research in economic geography has shown an increased concentration of wealth and high-paying jobs in certain regions, such as San Francisco and New York. Enrico Moretti's 2012 The New Economic Geography of Jobs, for example, showed that even low-skilled workers in high-wage regions make more than skilled workers in low-wage regions. So, software engineers in Beloit might actually be making less than low-skilled workers in SF. Now, imagine if Beloit was integrated more fully into the greater Chicago region. The Chicago region, with its more diversified economy, could bring more growth and opportunities to Beloit. Wages in Beloit would likely increase, and bring spill-over benefits for the immediate region. One of the likely reasons why job growth, wage increases, and productivity growth has been so concentrated in a few favored locations is precisely because of the lack of infrastructure allowing this growth to spread benefits more widely across regions. The lack of affordable transit alternatives also drives up the cost of housing in cities--workers would prefer to not have to commute 2+ hours in each direction. So, it's no wonder we have a situation in which nearly half of the country feels that they are completely disconnected from the vitality and entrepreneurial development happening in a few lucky cities. They literally are disconnected.

Sure, Trump has talked about an infrastructure package. But he has shown no intention of committing public dollars to sustainable transportation like high-speed rail. For Trump, infrastructure means selling off public roads to private companies, and building toll roads or simply expanding existing highways.

The kind of growth described by the initiatives in Beloit may be a particularly American vision of how economic development happens: visionary individuals, wealthy capitalists, small-scale changes and large dose of Horatio Alger optimism. But, this hands-off approach to local economic development is half-baked and likely to end up in wasted investments and missed opportunity. 

The question for small cities like Beloit is whether or not they can integrate into larger regional economies. This would enable these towns to participate in the global economy by integrating into supply chains and transportation networks such as international airports. If, for example, high speed rail enabled a direct connection from O'Hare Airport to Beloit, the city would become highly attractive to investors, and the software engineers currently there would be joined by others. Halfway in between Minneapolis and Chicago, with a university, Beloit would be on track for a more prosperous future. Sure, it probably won't become the next Silicon Valley. But that's not the goal. Without that public commitment to regional infrastructure, Beloit's revival will be short-lived. Let's hope for its sake, and the sake of small towns like it across America, we put aside outdated stigmas of rail transport and public spending, and create more widespread economic prosperity.